Explain how expansionary monetary policy might lead to a rise in inflation.

Discuss the view that the most significant impact of high inflation in a country is a loss of export competitiveness.

Answers may include:

• definitions of inflation and monetary policy
• diagram to show how rising AD leads to demand-pull inflation
• explanation that expansionary monetary policy means a reduction in interest rates which increases AD and leads to demand-pull inflation
• diagram to show how rising AD leads to demand-pull inflation
• examples of where expansionary monetary policy has led to inflation.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definition of export competiveness
• diagram to show how higher relative prices might impact on an AD/AS diagram
• explanation of how high inflation in a country may reduce the competiveness of its domestic firms in export and import markets if its inflation is higher than its competitors
• examples of where inflation has led to a fall in export competitiveness
• synthesis and evaluation (to what extent) of loss of export competitiveness as the most significant consequence of inflation.

Evaluation may include: other factors that could have caused a fall in a country’s export competitiveness, other consequences of inflation that could be more significant like redistribution of income, uncertainty leading to lower investment and the impact changes in the exchange rate could have on a country’s export competitiveness.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Opinions or conclusions should be presented clearly and should be supported by appropriate examples.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.

This was the least popular of the two Section B questions. The use of diagrams in this question was generally good. However, the labels used were not always precise. It is better to indicate that the horizontal axes refers to the spending and output of the whole economy, many candidates just record quantity. Valid real-world examples were rare and, where they were offered they tended not to be adequately developed. In general candidates were aware of what monetary policy was and of the links its use might have to inflation.

Candidates were generally able to explain the impact of inflation on export competitiveness. However, it proved more challenging to decide whether it was the most significant impact. High achieving responses considered other impacts of a high rate of inflation and then considered which would likely be the more significant. Examples help to tackle a question like this, so considering countries that are more export dependent or less export dependent might serve as appropriate cases in point.